The current study investigated language development of children residing in institutional care (IC) in Russia, compared to peers raised by biological family care (BFC). We used standardized behavioral testing (Preschool Language Scale-5, McArthur CDI), and an event-related potential picture–word matching paradigm. Children in IC significantly underperformed on the measures of receptive and expressive language development, with larger deficits in expressive domain. ERP findings indicated that children in IC did not demonstrate significant N400 effect in response to semantic violations; there were no significant group differences in semantic processing between IC and the BFC groups. In the late time window of 400–600 ms, phonologically legal pseudowords elicited an ERP component with the positive amplitude in the IC group, resembling P300 ERP component, whereas the BFC group showed the expected N400 effect. The findings point to less efficient lexical processing in the IC group. To the best of our knowledge, this study is the first to investigate both the behavioral and neuropsychological aspects of language development, focusing on phonological and lexical-semantic processing, in children who currently live in IC.